Today, the Australian government announced additional taxation of high income funds in the decumulation or retirement stage of investments in superannuation. Arguably, the changes add more to complexity than they do to equity, and they leave open the need for further changes to achieve a sustainable system.

In principle, funds invested into superannuation to provide income at retirement can be taxed at three levels. These levels are at the point of contribution, earnings during the accumulation phase, and at the phase of withdrawal for retirement. In addition to the current taxation of contributions and earnings, which are not to be changed, the government proposes to add a new tax on the withdrawals for the “fabulously wealthy” from July 1, 2014.

A progressive tax treatment is given to labour remuneration contributed to superannuation. For those with annual taxable incomes up to $37,000 a year, the effective contribution tax rate is zero; for those with incomes between $37,000 and $300,000 a year, a 15% marginal rate applies; and for those with an income above $300,000, a 30% rate applies. These rates are concessional relative to the progressive income tax rate schedule applied to wages and salaries, and to income invested in one’s own home, other property, bank deposits and shares.

Income earned on funds invested by the superannuation funds faces a flat tax rate of 10% on realised capital gains and 15% on interest, dividends and other capital income. This rate is concessional when compared with the taxation of personal investments in financial deposits and shares, for all but those with incomes below the effective tax free threshold of around $20,000 a year. These investments are taxed at the progressive personal income tax schedule. But, when compared against the effective tax rate on income earned on investments in one’s own home where the tax rate on imputed rent and capital gains is tax free, and for negatively geared property, the taxation of income earned on superannuation funds is higher.

Until the current policy announcement, funds withdrawn from superannuation for those aged 60 and over were tax free. This treatment applies to lump sums and to income streams, including annuities. Interestingly, the withdrawal of other personal investments in one’s own home, other property, shares, financial deposits and so forth are also tax free.

The proposed policy change is to add a new tax at a marginal rate of 15% on the income earned, or deemed to be earned, on superannuation funded pensions and annuities of more than $100,000 a year, or an accumulation asset of about $2 million. The new tax is to apply to defined benefit fund superannuation, including those of politicians, as well as to accumulation funds. The press release quotes Treasury calculations that in 2014-15 about 16,000 people or 0.4% of the projected retiree population will be affected.

Even against the criteria of equity, there has to be doubt about the sustainability of the new proposal and about other aspects of the taxation of superannuation. There is nothing magical — and very little logic — in the tax thresholds of $37,000 and $300,000 for higher tax rates on contributions to superannuation, or on the proposed $100,000 threshold for a retirement income stream. In particular, these thresholds seem unrelated to the progressive income tax rate schedule that applies to labour remuneration taken as wages, and to personal income taxation of savings placed in investments other than superannuation. It would be surprising if future governments, of any political persuasion, were not to fiddle with the thresholds.

There is a compelling case for a review of the taxation of superannuation, including the taxation of contributions, of income earned and of withdrawals, in a broad context of the taxation of labour remuneration and of different saving options, and the provision of retirement incomes. Ideally, a review would involve the community, and it would seek bipartisan support to achieve a stable and sustainable system to minimise opportunistic fiddles as has happened over the last decade. Yet such a comprehensive review clearly lies beyond the current election battle.

The Henry Review of 2010 provides one model. Other options include taxing superannuation similar to investment in one’s own home (namely tax contributions in the hands of the employee at the employee’s progressive personal income tax rate) with no further tax on earnings or on funds withdrawn for retirement income. Or, a consumption base tax treatment might be considered involving tax free on contributions and income, and tax withdrawals at the progressive personal rate. Consideration also should be given to caps on contributions and to aligning the ages of access to superannuation funds and the aged pension.